We spent all of yesterday bumping along dirt roads, on our way from the ranch to a small seminar organised by our old friend, Doug Casey.
One of the major topics: what’s ahead for the gold price?
Here, in advance, we give our view. Gold seemed to take off like a rocket this year. But recently, it looks more like a discarded booster engine, falling back to earth. This, despite global political tensions and the Fed’s economic pretensions.
We don’t know why it rose so rapidly, but we have a good idea why it fell.
First, investors discounted the political tensions. Who really cares if Crimea is a part of Russia? Nobody.
Second, as for the Fed, what has changed? Tapering is still on the table. But the Fed reserves the right to take it off the table any time it wants.
As Richard Duncan puts it, “forward guidance is very nice, but it is liquidity that moves the markets”. And currently, the Fed is providing plenty of liquidity. This liquidity, however, is going into risk assets, not into anti-risk assets. Stocks are a risk asset. Gold is not.
Most investors are pretty sure that the Yellen Fed has things under control. They see stocks going up and ask themselves: what’s to worry?
With nothing to worry about, and the memory of a 25% gain in US stocks fresh in their minds, why would they want to buy gold?
Third, the worry that usually moves gold most is inflation. That’s what sent it up 20 times in the 1970s, when consumer price inflation rose over 10%.
Consumer price inflation is not something that people are worried about now. And for good reason. As any economics professor would tell you, the CPI goes up when the quantity and velocity of money increases faster than the output of goods and services. Quantitative easing (QE) sounds like a big increase in the money supply, but the banks aren’t lending enough and households aren’t borrowing enough to bring the cash into the consumer economy.
Meanwhile, QE depresses interest rates, which encourages capital spending and increases output of consumer goods – both in the US and in its primary foreign suppliers. Services are plentiful too, as the people replaced by capital spending turn to parking cars and washing driveways.
The typical household income is lower than it was when the recession ended in 2009, so people have less money to spend. Under pressure, they are more careful about spending it, too. This decreases the speed with which cash changes hands, putting more downward pressure on prices.
Gold must see all this. It must know that consumer price inflation is not a problem. It must wake up in the morning, check the CPI reading, and go back to sleep.
The time will come, of course, when it gets up and does the bugaloo. But not now. Here’s what to expect over the next few years:
1. A sluggish, slumpy economy, perhaps accompanied by a small withdrawal of QE; gold goes mostly nowhere.
2. Stocks fall, causing a halt to tapering.
3. Stocks hesitate, then fall more.
4. The Fed panics and introduces more aggressive (money from helicopters?) moves.
5. Gold soars.